The world is stuck in a “low-growth trap” according to the Organisation for Economic Cooperation and Development.
Point of view
Chronically weak demand interacts with a lack of structural dynamism to produce slow growth
In its latest twice-yearly review, the OECD said with businesses wary of investing and consumers cautious about spending, the global economy will grow only 3.0 percent this year.
The US is predicted to expand its GDP by 1.8 percent, down from the OECD’s previous forecast of 2.0 percent because of weak foreign demand and less investment in the oil and mining sector.
Thanks to an improved outlook for the French and German economies, the OECD believes the eurozone economy will grow by 1.6 percent this year, better than the 1.4 percent it forecast in February, despite fears of the impact of a Brexit.
OECD (@OECD) June 1, 2016
Britain’s predicted growth rate was cut to 1.7 percent from the previous 2.1 percent, but only if it stays in the European Union.
On the Brexit the OECD’s economists repeated their warning that a vote to leave the EU would mean a sharp slowdown for the UK and substantially depressed growth in Europe and elsewhere.
A vote to leave in the June referendum could shear half a percentage point off British growth annually in the following years, the OECD estimated.
OECD Secretary-General Angel Gurria said this year will be no better than last year’s weak performance – the worst since 2009 – and he is pessimistic about next year: “Global growth is projected to pick up only modestly in 2017, 3.3 [percent]. Moreover this pick up hinges on avoiding significant downside risks like Brexit, like financial disruptions in emerging markets that are linked to high corporate debt and also to exchange rate risks.”
Low growth trap
Speaking to reporters, Gurria explained how the low growth trap works: “This low growth of consumption then feeds back into firms’ expectations about demand growth. And it results in weak investment. And, there we go again. Of course, the story doesn’t fit every single country in this precise way. There are additional shocks and additional factors at play. But overall, something like this dynamic appears to have been affecting the world economy over the past five years. It is a dynamic in which chronically weak demand interacts with a lack of structural dynamism to produce slow growth, scarred labour markets and dangerously low inflation.”
Governments failing in responsibilities
The OECD concludes central banks are being asked to do too much to lift growth and it blamed rich world governments for failing to revive demand and spend on growth-boosting initiatives like education and infrastructure.
Those government were urged to finance higher spending thanks to rock-bottom interest rates in many countries.